SAN JUAN, Puerto Rico – International economists released a critical report on Puerto Rico's economy Monday on the heels of the governor's warning that the island can't pay its $72 billion public debt.
The news that Gov. Alejandro Garcia Padilla delivered late Sunday was another jolt to the recession-gripped U.S. island, as well as a world financial system already worrying over Greece's collapsing finances.
Garcia is scheduled to air a pre-recorded televised address late Monday afternoon as legislators continue to debate a $9.8 billion budget that calls for $674 million in cuts and sets aside $1.5 billion to help pay off the debt. The budget has to be approved by Tuesday.
The governor hopes to defer debt payments while negotiating with creditors, spokesman Jesus Manuel Ortiz said late Sunday, confirming comments by Garcia that appeared in a report in The New York Times published that evening.
"There is no other option. I would love to have an easier option. This is not politics, this is math," Garcia is quoted as saying in the Times.
Puerto Rico's bonds were popular with U.S. mutual funds because they were tax-free, but hedge funds and distressed-debt buyers began stepping in to buy up debt as the island's economy worsened and its credit rating dropped.
Garcia's comments will likely not have much impact on Wall Street, said economist Jose Villamil, a former U.N. consultant and CEO of an economic and planning consulting firm.
"The markets are clear that Puerto Rico is heading to a direction of a restructuring or default," said the economist, adding that a voluntary restructuring by bondholders might be the best option.
"The last four administrations have kicked the can down the road," said Villamil. "At this point, there is no more can to kick. So we're going to take some very strict measures and some very profound measures. It's going to hurt, but there's no way out."
Sergio Marxuach, policy director at the Puerto Rico-based consulting group Center for the New Economy, drew parallels between the economic problems in Greece and Puerto, saying that "obviously Greece is in a much more complicated stage" and "I hope we don't end up there."
The Greek government decreed over the weekend that banks would be shuttered for six business days and restrictions imposed on cash withdrawals. Greece's five-year financial crisis has sparked questions about its continued membership in the 19-nation shared euro currency and the European Union.
A report released Monday by a former World Bank chief economist and others found that Puerto Rico's fiscal debt is larger than originally thought and urged the government to act quickly.
"This is a daunting agenda politically, legally and organizationally. It is also an urgent one: The government's cash balances can evaporate in the face of delays, reducing the room for maneuver and intensifying the crisis," the report stated.
The economists praised Garcia's administration for taking action on higher taxes, pension reforms, spending cuts and freezes, but they also noted that anticipated revenue projections systematically exceed collections, and that policy failures have in part caused Puerto Rico to be cut off from market access.
"Growth has not just been low, but output has actually been contracting for almost a decade now, which is remarkable for an economy suffering neither civil strife nor overt financial crisis," the report stated.
Puerto Rico's Secretary Treasury Juan Zaragoza acknowledged that the government revenue generated this year had failed to meet expectations, and said "I'm not surprised that we have no money."
Zaragoza called for a five to seven-year plan to deal with the island's economic problems, but said Puerto Rico wouldn't necessarily adopt all the recommendations in the report.
Some legislators were taken aback by Garcia's comments to the newspaper, including Rep. Jenniffer Gonzalez, spokeswoman for the main opposition party.
"I think it's irresponsible," Gonzalez said. "He met privately with The New York Times last week, but he hasn't met with the leaders of this island."
Puerto Rico's constitution dictates that the debt has to be paid before any other financial obligation is met. If Garcia seeks to not pay the debt at all, it will require a referendum and a vote on a constitutional amendment, she said in a phone interview.
Garcia recently confirmed that he had considered having the Puerto Rico government seek permission from the U.S. Congress to declare bankruptcy amid a nearly decade-long economic slump. His administration is currently pushing for the right for Puerto Rico's public agencies to file for bankruptcy under Chapter 9. Neither the agencies nor the island's government can file for bankruptcy under current U.S. rules.
The White House threw cold water Monday on the notion of bailing out Puerto Rico from its financial crisis, instead urging Congress to consider changing the law so the island can declare bankruptcy. White House spokesman Josh Earnest said the federal government would provide financial expertise and access to existing resources.
"There's no one in the administration or in D.C. that's contemplating a federal bailout of Puerto Rico," Earnest said. "But we do remain committed to working with Puerto Rico and their leaders as they address the serious challenges."
The U.S. Congress is in recess this week for the July 4 holiday, and the island's economic woes have not been an issue for lawmakers as they rushed to complete a high-profile trade bill, annual spending measures and other legislation before their break.
Puerto Rico's public agencies owe a large portion of the debt, with the power company alone owing some $9 billion. The company is facing a restructuring as the government continues to negotiate with creditors as the deadline for a roughly $400 million payment nears.
Garcia has taken several measures to help generate more government revenue, including signing legislation raising the sales tax to 11.5 percent and creating a 4 percent tax on professional services. The sales tax increase goes into effect Wednesday and the new services tax on Oct. 1, to be followed by a transition to a value-added tax by April 1.